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Sparks fly when clean technology meets financial innovation

By Justin Bull

November 27, 2013

For clean technology to truly change the way energy is produced and used, innovators will need to think beyond products and create new business models. Philips Lighting and Solar City are doing just that.

Philips just announced a new deal with Washington Metropolitan Area Transit Authority (WMATA) to replace lighting in 25 parking garages in the Washington D.C. metro area. By replacing over 13,000 fixtures, Philips will help WMATA reduce electricity use by 68 percent. But what’s most significant about the deal is who is paying: Philips. The company is financing the installation of the LED light fixtures that will generate an estimated $2 million in annual energy savings. Given the financials constraints faced by most municipalities, Philips sees performance contracts like these as critical to growing the LED lighting market.

Solar City has taken another innovative approach, leasing solar panels to its customers in the United States. But recently it went one step further, announcing plans to sell $58 million in asset backed securities. The assets backing those securities are the leases for solar panels that the company has sold across the country. This portends an era of “solar securitization” where the hundreds of millions of dollars in solar leases are packaged and sold to pension funds and other institutional investors. Solar City only gives leases to people with good credit, making this new asset class relatively low-risk. Half of the U.S.’s solar capacity was installed in 2012, in large part driven by leases that allow homeowners to avoid five-figure installation costs.

The biggest risk associated with these new financial models is the reliability of the underlying technology. Solar City sells panels with manufacturer warranties that last 20 years or more. But recent pressure on manufacturing capacity in China has caused problems and an increase in defective panels. Whether this is a short or long-term trend remains to be seen, but an increase in faulty panels could negatively impact any securities backed by solar leases.

LED lighting is an older and reliable technology, and arrangements like the performance contracts financed by Philips are not novel. ESCOs (Energy Service Companies) have long used performance contracts to help finance efficiency and retrofitting with large institutional clients.